New Rule Raises Standards for Some Investment Advisers–Well, Sort of.

Do you know whether your financial adviser is legally required to act in your best interest?  Many investors may be surprised at the question.  Shouldn’t all advisers be required to put their clients’ interests first, try to avoid conflicts of interest, be transparent about the reasons for advising certain financial moves and the fees that might be involved?  In our opinion, yes, they should.  (Our firm has been a registered investment advisor, RIA, since we opened in 1997, which means that we have always operated under this standard.)  However, this is not always the case.  A new rule from the Department of Labor (DOL) has shifted the industry in that direction, but the shift is still imperfect and incomplete, as we discuss below.

What Is the New Rule?  This month, a new DOL rule targeted at financial advisers went into partial effect.  The rule requires that financial advisers giving advice on retirement accounts such as 401(k)’s and IRAs be held to a fiduciary standard of care, meaning that they are legally bound to act in the best interest of their clients–putting clients’ interests above their own financial or other interests.  The DOL first proposed this rule in 2010, in part because many investors were unaware that their advisers were held to a much lower standard of care (called the “suitability” standard) and that they were paying a significant amount on commissions and fees.  Even earlier this year, a survey by the American College of Financial Services found that 48 percent of respondents working with a financial adviser did not know whether their adviser was a fiduciary or not.

What Does It Mean that the Rule Went into “Partial Effect”?  As might be expected, advisers that have operated for years under a lower legal standard have objected to the new fiduciary rule.  There has been significant lobbying against it, and its implementation has been delayed multiple times.  On June 9^th, the rule went into partial effect, meaning that advisers should now act as fiduciaries with respect to retirement accounts, but the rule will not actually be enforced until after it goes into full effect on January 1^st.  In the meantime, the DOL will continue to solicit public comments on the issue and deliberate whether the rule should be revised prior to full implementation.

This past May, DOL Secretary Alexander Acosta wrote, “Trust in Americans’ ability to decide what is best for them and their families leads us to the conclusion that we should seek public comment on how to revise this rule.”  In the words of Washington Post columnist Michelle Singletary, “What malarkey.”  Given how difficult it can be for those with limited financial knowledge or experience to decipher the costs and implications of different investment options, we respectfully disagree with Secretary Acosta and think that Americans could use a hand in protecting their savings and investments.  Whether this will come to pass, however, is yet to be determined.

Why Is the New Rule Incomplete?  In a post last year, we discussed how the final version of the DOL rule includes many exemptions and means by which brokers can continue earning excessive commissions for pushing particular investment products, even ones with notoriously high fees such as variable annuities.  The stipulations of the rule may be watered down even further prior to implementation on January 1^st.  Furthermore, the rule only applies to advice on retirement accounts.  If a financial adviser is managing a taxable account (non-retirement investments) for a client, he or she could still only be held to the lower suitability standard, meaning that brokers must simply have a “reasonable basis” for believing that a particular investment they sell is “suitable” for a client, considering a client’s circumstances.

Again, Professional Financial Solutions has already been operating under a fiduciary standard with respect to all of our clients’ investment accounts–retirement and non-retirement–since the year our company was founded, so this new rule does not significantly impact our manner of doing business.  We will continue to discuss with clients the pros and cons of any financial moves, promote low-cost investments as the most effective way of building clients’ wealth, and try to operate with complete integrity in how we advise our clients on financial planning and investment issues.

**If you’re interested in learning more about the fiduciary standard and other factors to consider in finding a financial adviser that you can trust, an informative (and fun) place to start is comedian John Oliver’s Last Week Tonight episode on retirement plans.v